VALUATION HIGHLIGHTS

1. Company Operated Stores constitute 59% of the Trefis price estimate for Starbucks's stock.
2. Licensed Stores constitute 31% of the Trefis price estimate for Starbucks's stock.
3. CPG, Food Service & Other constitutes 10% of the Trefis price estimate for Starbucks's stock.

WHAT HAS CHANGED?

Starbucks Tops Estimates in Q1

The coffee king's adjusted revenue rose 8% year-over-year (y-o-y) to a record $8.7 billion. That was below Wall Street estimates by $70 million. On a global level, comps rose 5% thanks to a higher average transaction size. The U.S. saw 10% growth in comp sales and the international market comps were up double digits internationally (excluding China). Starbucks' fastest-growing region (China), was decimated by Covid lockdowns. And when restrictions eased, cases of the disease started spiking. Comps in China, where there are currently 6,090 Starbucks stores, were down 29% in the quarter. It should be noted that higher labor costs and growth-related spending weighed on Starbucks' profitability. That said, its adjusted earnings per share of $0.75 missed analysts' expectations by 2 cents.

Note: Starbucks FY'22 ended on October 2, 2022. Q1'23 refers to the quarter that ended on January 1, 2023

Digital Strength Is A Bright Spot

The business now has 30.4 million 90-day active rewards members in the U.S., up 15% y-o-y. And customers loaded their accounts with $3.3 billion of funds during the fiscal first quarter, demonstrating how powerful the brand still is. Also, the company opened 459 net new stores in Q1, ending the period with 36,170 stores globally: 51% company-operated and 49% licensed

FY 2023 Guidance

Despite macroeconomic headwinds and inflation, the leadership team reiterated its fiscal 2023 financial targets of 11% revenue growth (at the midpoint) and adjusted EPS growth of at least 15%. Starbucks expects its U.S. comparable sales to grow by as much as 9% in 2023. It also anticipates its sales in China will rebound as the country eases its Covid restrictions. Additionally, Starbucks intends to expand its global store count by roughly 7%, fueled by growth in its international markets.

Resumed Share Repurchase Program

In Q1 fiscal 2023, the company resumed its share repurchase program, repurchasing 1.9 million shares of common stock valued at $191.4 million; approximately 50.6 million shares remain available for purchase under the current authorization. Going forward, the company expects to return approximately $20 billion to shareholders by the end of fiscal 2025 between dividends and share repurchases.

Starbucks Exited Russia

Starbucks officially exited Russia after suspending its business in the nation in March 2022 in reaction to the Russian invasion of Ukraine. It had 130 locations in Russia and it operated through various licensing deals. The region accounted for less than 1% of the company’s annual revenue.

BUSINESS SUMMARY

Starbucks is the world’s leading roaster and retailer of specialty coffee. Through its global network of owned and franchised coffee retail outlets, Starbucks offers a wide range of products like high-quality whole bean coffees, freshly brewed coffees, Italian-style espresso beverages, cold blended beverages, food items like sandwiches, premium teas, and coffee-making equipment.

Starbucks' own stores are located near offices and residential areas and are larger in size, compared to its licensed stores which are much smaller and mostly located at airports and supermarkets.

Starbucks also sells its packaged coffee and tea through retail channels such as grocery stores, warehouse clubs, convenience stores, and US food service accounts.

SOURCES OF VALUE

The Company-Operated Stores division is more valuable than the Franchise Stores division for Starbucks because of the following two reasons:

Company-operated stores generate more revenues than franchised stores

Starbucks makes money through its company-owned stores as well as through franchise fees and royalties from franchised stores. Starbucks earns higher profit margins from franchised stores compared to company-owned stores because there are no operational and employee costs involved with franchised stores, hence Starbucks gets to keep the entire royalty & rent fee without paying for any costs.

Revenues earned from Starbucks' company-owned stores are much higher than the franchised stores. This is because, although there are costs involved, Starbucks owns 100% of the revenues from its own restaurants, while it gets a percentage of the revenues (in the form of royalty fees) from its franchised restaurants.

Number of company-owned stores comparable to franchised stores

Food & beverage companies, in general, increase their reach and profits by having a large base of franchised stores. For example, McDonald's has four times more franchised restaurants than company-owned restaurants, making the franchise business more valuable to its stock. However, Starbucks has almost an equal number of company-owned stores and franchised stores. In FY 22, Starbucks had 18,523 company-owned stores and 17,458 franchised stores making a total of 35,711 stores.

KEY TRENDS

Growth in China

China continues to remain a long-term growth driver for the company, as its GDP, is projected to grow from around $18 trillion in 2022 to nearly $28 trillion by 2027 - likely driven by a massive increase in its middle class. Moreover, the per capita coffee consumption in China is about one-half of one cup per person per year compared to approximately 300 cups per person per year in the U.S. While consumption levels in China may never be able to match those in the U.S., even attaining a small fraction of it will benefit the company immensely.

International expansion fueling growth

Most of the new restaurants the company plans to open are in China/Asia Pacific. The number of Starbucks outlets in these countries is still much less than the number in the U.S. New outlets opened will be a mix of company-operated and franchised restaurants.

Focus On Drive-Thrus

SBUX intends to open a majority of its new U.S. restaurants in middle America and the south, with over 80% of stores built in the year being drive-thrus. The company states that its research has indicated significant opportunities for store expansion in higher-growth, and lower-cost markets, particularly when considering rising wages and occupancy costs.